Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for July 21st, 2012

There has been a lot of noise since yesterday because of the new Foreign Exchange Agreement (Convenio Cambiario #20) between the Central Bank and the Venezuelan Government, with most of the focus placed on the fact that bank accounts may now be opened in foreign currency in Venezuela. However, it is a limited form of bank accounts that can really be opened, as I will explain below. But first let’s review the current foreign exchange system before the new decree came out:

There are two ways of accessing foreign currency today in Venezuela. First, via Cadivi, which gives you dollars for imports, travel and certain medical treatments and studies. These dollars are sold to you at Bs. 4.3. You pay in Bs. and Cadivi pays the provider or if it is money for travel, you use your credit card in foreign currency and pay your bank in Bolivars. Similarly, banks are allowed to give you some cash for travel, which you pay in Bolivars. There may be dollars for other things, but they are not critical for the discussion.

The second way to get dollars is via SITME, the Central Bank’s foreign exchange system, in which you buy bonds, sell them abroad and you receive foreign currency. Companies can buy up to US$ 50,000 per day at the rate of Bs. 5.3 per US$ , but no more than US$ 350,000 per month if they satisfy certain requirements. Similarly, individuals may obtain up to US$ 5,000 per year for travel, $10,000 for health problems and $6,000 to send to relatives via SITME at the rate of Bs. 5.3 per US$. The only common criteria in both cases, is that you have a US$ account abroad in your name to receive the funds.

Thus, what the new Foreign Exchange Agreement does first, is to allow local banks to open accounts in foreign currency for both companies and individuals in order to receive US$ that originate in SITME. This is done, because only those that had accounts abroad could receive dollars from SITME, no more, no less. It does not mean, like some people suggest that “Venezuelans will be able to save in US$ locally” from now on. People will buy dollars via SITME and more likely than not, will immediately send the money elsewhere or spend it. Nobody in their right mind is going to add to these accounts any new funds for reasons that are too obvious to mention. But let’s suggest just two: The Government could order their forced conversion to local currency (The banks will actually have the dollars at the Central Bank) at any time and the Government will know how much you have. That should be sufficient to scare away anybody.

The second thing the Foreign Exchange Agreement does, is to allow foreign companies doing infrastructure, “public investment” or development projects to have local bank accounts in dollars, which they will be able to mobilize via partial or total withdrawals in local currency at the official rate of exchange (Bs. 4.3 per US$).

Finally, and this is likely to be the most relevant thing, the Foreign Exchange Agreement allows “State companies” which obtain foreign currency from their exports to devote up to 5% of the average monthly balance of their foreign currency accounts, to acquire bonds in the secondary market to be sold in the SITME Foreign Exchange System.

Read: State companies will now be able to sell 5% of what they have in their dollar accounts at Bs. 5.3 per US$, rather than at the Bs 4.3 per US$ that they were forced to sell their foreign currency to the Central Bank before.

What this is, is a small partial devaluation of the currency which will give PDVSA and in lesser grade, other state companies, more Bolivars for the foreign currency obtained from their exports.

This also means that the offer in SITME will increase by 30-35%, as these bonds bought by the State enterprises flow to the SITME, rather than directly to the Venezuelan Central Bank. So far this year, the average daily volume via SITME has been around US$ 43-45 million, so we could see around US$ 56-60 million per day once this gets going.

One interesting consequence of this, is that PDVSA will have more local currency and less pressure to sell new bonds in the international markets. Another minor one, is that these companies will buy bonds in the open market, which can take up to a month to come back to the international markets, which means there will be a small impact on supply, which will be reduced.

Thus, the agreement aims to extend the people that can get SITME dollars. make it more practical for some foreign companies to operate in Venezuela and allow Government owned companies to get more Bolivars for their dollars which originate in exports.

That’s it, boys and girls, nothing to get too excited about. It’s actually quite boring and of secondary importance when you come down to it.